2/04/2008 @ 12:02AM

Yahoo! Exits Music Subscription Biz

It sounds like a mighty tempting offer: pay a flat monthly fee to listen to all the music you want.

Take your pick: rock, jazz, country, blues or classical. Individual songs or entire albums. From nearly every major recording artist you can think of.

And yet despite these features, online music subscription services have failed to connect with a mass audience, hampered by their incompatibility with the
Apple
iPod and other usage restrictions.

Now
Yahoo!
is becoming the latest player to exit the market.

Under a strategic partnership with Rhapsody America, Yahoo! will transfer all customers of its Yahoo! Music Unlimited subscription service to Rhapsody and market Rhapsody’s service on its Web site. The two sides said they also plan to cooperate in other digital music initiatives, including the sale of music downloads. They declined to say how many Yahoo! customers were being transferred to Rhapsody.

Rhapsody America, a joint venture company owned by
RealNetworks
and
Viacom
unit MTV, was formed last year through the combination of Real’s Rhapsody subscription service and MTV’s Urge service.

Yahoo! Music’s exit from music subscriptions won’t affect its free services, such as its popular LaunchCast Internet radio service and its library of music videos.

Ian Rogers, vice president of video and media applications at Yahoo!, said Yahoo!’s focus across all its media properties is to be a mass market leader in each of its categories by emphasizing free services. A music subscription service no longer fits that strategy, he said.

The Yahoo!-Rhapsody deal is the latest sign of consolidation in the music subscription business. In January 2007,
Time Warner
closed its 5-month-old AOL Music Now service and folded its customers into competing service
Napster
. A month after the merger of Rhapsody and Urge in August, Britain’s Virgin Group shuttered its U.S. subscription service Virgin Digital.

Rhapsody America’s assumption of Yahoo! Music Unlimited’s customers leaves Rhapsody and Napster as the only U.S. subscription services of significant size. Napster said it had about 750,000 subscribers at the end of September, up from about 518,000 a year earlier. RealNetworks doesn’t release subscriber totals but its role as a consolidator suggests that it has sizable heft.

By paying a monthly fee, music subscription customers get to stream as much music as they want on their computers and can also download songs to play on a portable music player. But the downloads aren’t compatible with the iPod and are wrapped in “digital rights management” restrictions that render them unplayable once a subscription lapses.

These usage restrictions have reduced the mass-market appeal of the services. Indeed, Yahoo!’s Rogers has been an outspoken critic of the licensing restrictions that record labels impose on subscription services. But while the labels have recently demonstrated a willingness to sell downloads a la carte without DRM restrictions, they still view DRM as essential to any all-you-can-eat subscription service.

Despite its challenges, the subscription business isn’t going away any time soon, partly because it retains the strong support of the recording industry, which has been struggling to find new ways of generating revenue amid sharply declining sales of compact discs. The idea of charging a recurring monthly fee for access to their music holds great appeal to major record labels like Vivendi unit Universal Music Service, Sony-BMG Music Entertainment,
Warner Music Group
and EMI Group.

Microsoft
, which made a $44.6 billion offer for Yahoo! on Friday (See: “The Yahoo! Deal“), still runs a subscription service for its Zune music player. Universal said in December that it has agreed to provide its music to cell-phone maker
Nokia
for use in a music subscription service to be offered with some Nokia handsets. And
CBS
is considering the possibility of offering a subscription service via its online music social network Last.fm. (See: “CBS Adds On-Demand Music To Last.fm“)

But while consumers have long been accustomed to making monthly payments to their cable company for TV programming and movies, they still show a preference for owning their favorite tunes, whether they buy them or get them for free from peer-to-peer file-sharing sites.

At a time when advertising-supported free music is gaining prominence (See: “Universal Sets Music Free On Imeem“), how can the music subscription business win over consumers? Due to the usage restrictions attached to subscription downloads, the future of music subscriptions may depend on how quickly they can provide streaming music to a wide range of devices other than a computer.

To this end, Rhapsody has signed deals with Sonus,
TiVo
, Logitech and other makers of home-entertainment equipment to integrate Rhapsody subscriptions into their products. Expect to see more such deals in the future.